Malaysia Daily

Tuesday, April 30, 2013

Hartalega Holdings (HART MK)

FY13 Results Preview: Wrapping Up Commendably
We expect a flat quarter in Hartalegas 4QFY13 results, but foresee commendable FY13 results, driven by the recovery period post overstocking issues in 2011. Positively, the margin contraction anticipated could be temporary mitigated by: a) a notable fall in raw material prices and b) slower-than-expected (but still rapid) industry capacity expansion. Maintain SELL with a revised target price of RM4.25 (previously RM4.05). Whats New Another flattish quarter... Hartalegas 4QFY13 results are expected to be released on 7 May 13. We expect low single-digit qoq growth for both top-line (3QFY13: RM259.6m) and net profit (3QFY13: RM60.5m), backed by a decent <5% volume growth and improved productivity level. but wrapping up a good FY13. We expect Hartalegas FY13 results to be slightly ahead our forecast of RM220m, but likely to be within consensus estimates of RM229m. Pricing pressure continues to hit the nitrile gloves segment... Hartalega implemented a general +2-3% price hike on its products in Feb 13 to address the rising labour cost from the minimum wage policy. However, due to the ongoing intense pricing competition within the nitrile glove segment, we understand that the price hike will not be sustainable, presumably due to buyers resistance to factor in the notable decline in raw material costs. We expect ASPs to remain soft, and likely to be riding on a downward trend. ...but margin compression may temporary ease at this juncture. Our concern on Hartalegas margin compression may ease in the short term as our channel checks revealed that the actual capacity expansion in nitrile glove production is less rapid as planned by the big industry boys amid the easing raw materials cost trends.

SELL
(Maintained)

Company Update
Share Price Target Price Upside (Previous TP RM5.26 RM4.25 -19.2% RM4.05)

Company Description Rubber Gloves Manufacturer Stock Data GICS sector Bloomberg ticker: Shares issued (m): Market cap (RMm): Market cap (US$m): 3-mth avg daily t'over (US$m):

Health Care HART MK 733.5 3,858.2 1,272.2 1.1

Price Performance (%) 52-week high/low RM5.29/RM3.58 1mth 3mth 6mth 1yr YTD 6.5 13.6 13.9 34.0 10.7 Major Shareholders Hartalega Industries Sdn Bhd Budi Tenggara Sdn Bhd FY14 NAV/Share (RM) FY14 Net Cash/Share (RM) Price Chart
(lcy) 5.50 5.00 4.50 110 4.00 100 3.50 3.00
10
HARTALEGA HOLDINGS BHD Hartalega Holdings Bhd/FBMKLCI Index

% 50.2 5.0 1.29 0.23

(%) 140 130 120

90 80

Key Financials
Year to 31 Mar (RMm) Net turnover EBITDA Operating profit Net profit (rep./act.) Net profit (adj.) EPS (sen) PE (x) P/B (x) EV/EBITDA (x) Dividend yield (%) Net margin (%) Net debt/(cash) to equity (%) Interest cover (x) ROE (%) Consensus net profit UOBKH/Consensus (x) 2011 735 274 245 190 190 26.1 20.2 7.7 13.5 1.5 25.8 (15.8) 111.1 44.7 2012 931 299 260 202 202 27.7 19.0 6.2 12.4 1.8 21.7 (22.4) 171.9 36.2 2013F 1,046 313 271 220 220 30.3 17.4 5.0 11.8 1.9 21.0 (21.7) n.a. 31.8 229 0.96 2014F 1,215 375 319 258 258 35.5 14.8 4.1 9.9 2.3 21.2 (18.2) n.a. 30.3 263 0.98 2015F 1,461 429 358 289 289 39.7 13.2 3.4 8.6 2.5 19.8 (17.2) n.a. 28.0 295 0.98

Volume (m)
5 0

Apr 12

Jun 12

Aug 12

Oct 12

Dec 12

Feb 13

Apr 13

Source: Bloomberg

Analysts Vincent Khoo, CFA +603 2147 1998 vincentkhoo@uobkayhian.com Siew Vanice +603 2147 1996 siewvanice@uobkayhian.com

Source: Hartalega, Bloomberg, UOB Kay Hian

Refer to last page for important disclosures

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Malaysia Daily
Tuesday, April 30, 2013
Stock Impact H7N9 avian flu virus continues to spread. The number of H7N9 cases and deaths are still climbing. Based on the latest statistics released by Chinese health officials on Tuesday, 23 Apr 13, there were 108 confirmed cases and 22 confirmed deaths. The H7N9 avian flu virus, which started from Shanghai and Anhui, has spread to Shandong's Zaozhuang city. Minimal upside in the event of deteriorating H7N9 avian flu condition Given that the China market is predominantly plastic and natural rubber glove users, we foresee any upsurge in demand for rubber gloves will benefit the natural rubber gloves producers, thus, benefitting Hartalega least within the sector. We also note that Hartalega is currently operating at its optimum utilisation rate (close to 90%), thus there is minimal room to capitalise any increase in demand. Raw material price trading on the softer end. Nitrile butadiene (NBR) prices continue to head south, trading at an average price of US$1,373/tonne in 3M13 (-16% vs 3M12) alongside with the sliding latex prices (-17% vs 3M12). We expect raw material prices to remain soft, especially entering into 2H13, driven by ample supply in the market and weak demand from the global market. Hence, we have tweaked our NBR cost assumption to an average of RM4.00/kg for 2013 (previously RM4.50/kg). Seeing production capacity capped in FY14-15. While we note that the capacity expansion in Plant 6 is well executed, (expecting the 10 double former production lines to be fully ready by Jul 13) we maintain our conservative view that capacity expansion may be stalled in FY14-15 due to the delay in the commencement of Next Generation Integrated Glove Manufacturing Complex (NGC), which is targeted to commence construction in 2H13. We understand that the construction period of a manufacturing plant would generally require 1-1.5 years. This raises our concern on the companys prospective earnings post FY14, as there will be no additional capacity kicking in after the completion of Plant 6 by Jul 13. We foresee potential low growth visibility in FY14/15. Quarterly Production Capacity And Utilisation Rate
(% ) 95% 90% 85% 80% 75% 70% 65%
Production capacity (RHS) Utilisation rate (LHS)

(m' pcs) 3.0 2.8 2.6 2.4 2.2 2.0 1.8 1.6 1.4 1.2

Source: Hartalega

NBR Prices
U S$/tonne 2,300 2,100 1,900 1,700 1,500 1,300 1,100 900 700 500 Jan 09 Jul 09 Jan 10 Jul 10 Jan 11 Jul 11 Jan 12 Jul 12 Jan 13 US$2,085/tonne -36% from peak

Source: Hartalega

ASP
(RM/'000 pcs) 120 115 110 105 100 95 90 3QFY13F 4QFY13F 1QFY11 2QFY11 3QFY11 4QFY11 1QFY12 2QFY12 3QFY12 4QFY12 1QFY13 2QFY13

Source: Hartalega, UOB Kay Hian

1-year Forward PE Band

(RM) 6 5 4 3 2 1 0 08 09 10 11 12

Earnings Revision/Risk We have tweaked our FY14-15 earnings forecasts by +6% and +5% respectively to factor in our new NBR price assumption of an average price of RM4.00/kg. Valuation/Recommendation Maintain SELL with a slightly higher target price of RM4.25 (previously RM4.05) based on 12x FY14F PE (based on fully diluted EPS), which is close to 1SD above its historical mean PE. Margin compression remains as a concern. The margin compression anticipated could be temporary mitigated by a) slower-than-expected industry capacity expansion as part of the aggressive nitrile glove capacity expansion projected in 2013 are likely to delayed to 1H14 and b) we foresee a last run in the substitution effect of nitrile glove demand in the US market (current product mix of nitrile vs latex gloves stands at 74:26).

Source: Bloomberg, UOB Kay Hian

Share Price Catalyst Slowing capacity expansion in the nitrile glove production among the other manufacturers within the industry.

Refer to last page for important disclosures

1Q FY 1 2Q 0 FY 10 3Q FY 1 4Q 0 FY 1 1Q 0 FY 1 2Q 1 FY 1 3Q 1 FY 1 4Q 1 FY 1 1Q 1 FY 1 2Q 2 FY 1 3Q 2 FY 1 4Q 2 FY 1 1Q 2 FY 1 2Q 3 FY 1 3Q 3 FY 13

PE Band (HART)
2sd = 17.7x 1sd = 13.7x mean = 9.6x -1sd = 5.5x

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Malaysia Daily
Tuesday, April 30, 2013

Profit & Loss

Year to 31 Mar (RMm) Net turnover EBITDA Deprec. & amort. EBIT Net interest income/(expense) Pre-tax profit Tax Net profit Net profit (adj.) 2012 931 299 38 260 (2) 259 (57) 202 202 2013F 1,046 313 43 271 4 275 (55) 220 220 2014F 1,215 375 56 319 4 322 (64) 258 258 2015F 1,461 429 71 358 3 361 (72) 289 289

Balance Sheet
Year to 31 Mar (RMm) Other LT assets Cash/ST investment Other current assets Total assets ST debt Other current liabilities LT debt Other LT liabilities Shareholders' equity Minority interest Total liabilities & equity 2012 380 163 209 752 13 67 12 40 620 1 752 2013F 487 191 198 876 13 47 12 40 765 0 876 2014F 647 295 223 1,165 113 64 12 40 936 0 1,165 2015F 783 319 268 1,370 113 78 12 40 1,128 0 1,370

Cash Flow
Year to 31 Mar (RMm) Operating Pre-tax profit Tax Deprec. & amort. Working capital changes Other operating cashflows Investing Capex (growth) Investments Proceeds from sale of assets Others Financing Dividend payments Issue of shares Proceeds from borrowings Loan repayment Others/interest paid Net cash inflow (outflow) Beginning cash & cash equivalent Changes due to forex impact Ending cash & cash equivalent 2012 201 259 (49) 38 (25) (22) (60) (35) 0 0 (25) (95) (87) 0 0 (14) 7 46 117 0 163 2013F 252 275 (55) 43 (6) (4) (150) (150) 0 0 0 (74) (74) 0 0 0 0 28 163 0 191 2014F 291 322 (64) 56 (19) (4) (200) (200) 0 0 0 13 (87) 0 100 0 0 104 191 0 295 2015F 321 361 (72) 71 (36) (3) (200) (200) 0 0 0 (97) (97) 0 0 0 0 24 295 0 319

Key Metrics
Year to 31 Mar (%) Profitability EBITDA margin Pre-tax margin Net margin ROA ROE Growth Turnover EBITDA Pre-tax profit Net profit Net profit (adj.) EPS Leverage Debt to total capital Debt to equity Net debt/(cash) to equity Interest cover (x) 3.8 4.0 (22.4) 171.9 3.1 3.2 (21.7) n.a. 11.7 13.3 (18.2) n.a. 10.0 11.1 (17.2) n.a. 26.7 8.9 6.5 6.3 6.3 6.3 12.3 4.9 6.4 9.1 9.1 9.1 16.2 19.6 17.2 17.2 17.2 17.2 20.3 14.4 12.0 12.0 12.0 12.0 32.1 27.8 21.7 29.2 36.2 30.0 26.3 21.0 27.0 31.8 30.8 26.5 21.2 25.3 30.3 29.4 24.7 19.8 22.8 28.0 2012 2013F 2014F 2015F

Refer to last page for important disclosures

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Malaysia Daily
Tuesday, April 30, 2013

We have based this document on information obtained from sources we believe to be reliable, but we do not make any representation or warranty nor accept any responsibility or liability as to its accuracy, completeness or correctness. Expressions of opinion contained herein are those of UOB Kay Hian Research Pte Ltd only and are subject to change without notice. Any recommendation contained in this document does not have regard to the specific investment objectives, financial situation and the particular needs of any specific addressee. This document is for the information of the addressee only and is not to be taken as substitution for the exercise of judgement by the addressee. This document is not and should not be construed as an offer or a solicitation of an offer to purchase or subscribe or sell any securities. UOB Kay Hian and its affiliates, their Directors, officers and/or employees may own or have positions in any securities mentioned herein or any securities related thereto and may from time to time add to or dispose of any such securities. UOB Kay Hian and its affiliates may act as market maker or have assumed an underwriting position in the securities of companies discussed herein (or investments related thereto) and may sell them to or buy them from customers on a principal basis and may also perform or seek to perform investment banking or underwriting services for or relating to those companies. UOB Kay Hian (U.K.) Limited, a UOB Kay Hian subsidiary which distributes UOB Kay Hian research for only institutional clients, is an authorised person in the meaning of the Financial Services and Markets Act 2000 and is regulated by Financial Services Authority (FSA). In the United States of America, this research report is being distributed by UOB Kay Hian (U.S.) Inc (UOBKHUS) which accepts responsibility for the contents. UOBKHUS is a broker-dealer registered with the U.S. Securities and Exchange Commission and is an affiliate company of UOBKH. Any U.S. person receiving this report who wishes to effect transactions in any securities referred to herein should contact UOBKHUS, not its affiliate. The information herein has been obtained from, and any opinions herein are based upon sources believed reliable, but we do not represent that it is accurate or complete and it should not be relied upon as such. All opinions and estimates herein reflect our judgement on the date of this report and are subject to change without notice. This report is not intended to be an offer, or the solicitation of any offer, to buy or sell the securities referred to herein. From time to time, the firm preparing this report or its affiliates or the principals or employees of such firm or its affiliates may have a position in the securities referred to herein or hold options, warrants or rights with respect thereto or other securities of such issuers and may make a market or otherwise act as principal In transactions in any of these securities. Any such nonU.S. persons may have purchased securities referred to herein for their own account in advance of release of this report. Further information on the securities referred to herein may be obtained from UOBKHUS upon request. UOB Kay Hian (Malaysia) Holdings Sdn Bhd (210102-T) Suite 19-02, 19th Floor, Menara Keck Seng, 203 Jalan Bukit Bintang, 55100 Kuala Lumpur, Malaysia. Tel: (603) 2147 1988, Fax: (603) 2147 1983 http://research.uobkayhian.com Page 8 of 8